Coal stocks gain as natural gas rises in price

Sling shot.

Shares of U.S.-based thermal coal producers surged after a lower-than-expected building in U.S. natural gas inventories caused a jump in the price of natural gas, which in turn made coal-based electrical generation more competitive, at least in the minds of investors.

Shares of companies such as Arch Coal (ACI), James River Coal (JRCC) and Alpha Natural Resources (ANR) all surged more than 15% as a result. Coal stocks have been horrendously savaged in the last 12 months, as a plummeting natural gas price caused some coal-fired plants to power-down due to lack of competitiveness.

With natural gas firmly above $3 per mcf, seemingly on the way to $4 per mcf, thermal coal has quickly become much more attractive. In a sub- $3 gas price environment, gas-fired power generation served as the corrective mechanism to reduce the storage surplus.

Looking in the rear view mirror, natural gas prices reached their nadir in April. That said, the necessity of low gas prices, and corresponding anomalous strength in gas-fired power demand is now receding with gas-fired power demand expecting to wane later this year in favor of coal.